Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
Retirement may be something you’ve been fantasizing about ever since the day whatshisname in accounting swiped that leftover slice of pizza you were saving from the office fridge. You’ve probably already got a million plans for retirement. Maybe you want to visit every country in Africa, and in your spare time, master Rachmaninoff’s Concerto 3, a little ditty that’s been called the hardest piano piece every written. Or maybe you want to sleep til 10:00 AM most days, acquire roomy sweatpants for every occasion, and become the D.B. Cooper of sneaking burritos into multiplex matinees. Plans are easy. What’s a lot harder to come up with is a specific series of things you’re going to do in order to make your plans a reality.
That’s where this step-by-step guide will come in handy. We aim to provide easy-to-follow advice about retirement for everyone, from recent university grad whippersnappers to those who are literally one coffee break away from retirement. Resorting to hoary Chinese proverbs might seem cheesy, but there’s one that’s been uttered by generations of financial planners that we happen to like: “The best time to plant a tree was twenty years ago. The second best time is today.” In other words, giddyap future retiree—it’s never too late to get ready. Here's how to make a retirement plan.Our team of Portfolio Managers can help you set goals that are meaningful. And make a plan to get there — book a call now.
In Brief: Retirement planning
Do a pre-retirement check
Figure out when you want to retire
Understand how much you need to retire
Know what benefits you’ll get
Uncover how much extra you need to save
Discover the best accounts to use
Stick to your plan
Prepare for the transition
What to do before creating a retirement plan
A good way to begin your journey is with a checklist. Regardless of age, anyone will greatly benefit from a checklist of pre-retirement actions.
1. Create an emergency fund
Before you even start saving for retirement, make sure that you have an emergency fund of between three and six months of your total living expenses put safely away in a safe, easily-accessed place, like a high interest savings investment account. “There are going to be constant surprises in life that you're not expecting when you’ll need access to funds, whether your basement floods, you need a new roof, or you have a health emergency.” An emergency fund will prevent you having to rely on credit cards or loans that will come with high interest rates that will quickly erode any of your savings.
2. Pay Yourself First
This one’s a philosophical way to approach savings that states that no dollar is to go anywhere—be it rent, entertainment, or food—until you’ve first put that 20% towards your retirement. It will probably prove easier than it sounds. Most employers will allow you to make direct deposits into retirement accounts, be they Registered Pension Plans or Registered Retirement Savings Plans. Remember, always max out your pension first if your employer offers matching funds.
3. Create a will
Unless your family name is Nosferatu, you’re going to die. Do your heirs a favor and make sure that your intentions are clearly spelled out. “Death is already a stressful enough situation that the transition of your wealth should be as smooth as possible,”. An important part of retirement planning is making a will. There's a big misconception that you need to be a certain age or have a lot of stuff to make a will. But as Daniel Goldgut, Co-Founder and CEO of Epilogue points out:
"The reality is, in almost every situation, dying without a Will can leave your loved ones not only grieving but also navigating a complex legal system that is stressful and costly."
4. Buy some life insurance
Sure, this is a retirement guide and you won’t be too concerned about such earthly matters during your eternal dirt nap, but no man’s an island, especially one with a spouse and/or kids. “Life insurance that you take out on yourself could help your family kind of live the same lifestyle and help them start planning for their own retirements,” Mike Allen says. Pro tip: the younger and healthier you are, the cheaper the insurance.
5. Estimate your retirement expenses
There’s no way to figure out how much you’ll need to save for retirement until you figure out how much you’ll be spending. Guides like this one and replacement ratio calculators will help you come up with an actual number by taking into consideration such truisms as estimate high, don’t forget taxes, and take into consideration inflation.
6. Set a retirement date
It will be awfully difficult to calculate how much you need to save if you don’t have at least a rough idea of when you’ll be retiring. In ten years? Fifteen? Twenty? Even an approximation will be incredibly helpful in computing what you’ll need to be putting aside now.
Figure out when you can retire
The first step to creating a retirement plan is figuring out when you can retire. If you’re over 18, the answer, is whenever you darned well please. Just as you don’t need to raise your hand to use the bathroom anymore or get a permission slip to adorn your face with any regrettable face tattoo your nightmares could conjure, retirement age is whatever you choose it to be. If you want to retire early you'll have to save a lot of money over a short period of time. Should you choose to retire late you'll probably be able to save less each year over a longer time period. For more on this unanswerable query, you may want take a look at our more in depth article on when you can retire. You’ll learn that the more pertinent question is; do I have enough to retire?
A 40 year old retiree will need to cover 40 to 50 years of living expenses. So unless your surname is Gates or Bezos, making ends meet in retirement can be a real struggle. Rules of thumb in most retirement guides won't be personal to you. Input your current and future savings to a retirement calculator and you'll get a more accurate picture of when you can retire. It’s no accident that most people retire in their sixties and early seventies. It’s around this age that the government provides certain benefits to help older people pay their bills, without which, many people simply wouldn’t be able to survive.
There's no official “retirement age” in Canada. That said, after your 65th birthday, the government will provide two small safety nets should you wish to retire. The Canada Pension Plan (CPP) considers “normal” retirement age to be 65, though you can collect a reduced benefit at 60; 65 is the earliest you're eligible for Old Age Security (OAS). How much CPP you’re entitled to depends on how much you’ve paid into the system over the years, but the current average CPP payment can be found here.
Will the retirement age increase or change?
The retirement age will in all likelihood someday be raised above 65. In 2012, then Prime Minister Stephen Harper announced that between 2023 and 2029, retirement age would be raised to 67, to put it in line with changes or planned retirement age hikes in Australia, Britain, the United States and many other countries, which were raised to account for increasing lifespans of Canadians. In 2015, as soon as he was elected, Prime Minister Justin Trudeau cancelled Harper’s plans. Considering articles like this one, arguing that 65 places a too great economic strain upon our government, it’s quite likely that any new administration will again consider raising retirement age to 67 or even higher.
Could retirement be a thing of the past?
It’s not difficult to locate news articles that predict some variation of “Retirement As We Know It Is Over.” It’s certainly true that times have changed since dad might work for GE for 30 years and kick back earning his full salary for his remaining days. A recent survey of American workers conducted by the American Institute for Economic Research found that 82% of respondents 50 and older planned to keep working past the age of 65.
"The days of the gold-watch retirement where we have an office party and maybe some punch and cookies and never work again are more mythical than a reality,'' - Catherine Collinson, President of the Transamerica Center for Retirement Studies
She went on to say that few workers envision that type of retirement and many plan to keep on working part-time even after they retire. It even raises the question is retirement the right word.
Do folks just love working so much they’re compelled to do it until their dying day? Not at all. We’re just too broke to stop. According to a recent study, a full third of Baby Boomers, the generation closest to retirement age, have less than $25,000 in retirement savings, and more than 20% have nothing set aside at all. Even if you have significant savings going into retirement, you may still be concerned about how long it will last.When it comes to saving for retirement, there's no time like the present. Take our risk-free survey and in just 5 minutes we'll set you up with a personalized investment portfolio to suit your needs.
Understand how much retirement savings you need
You want to retire, the next step in retirement planning is figuring out how much you'll need. The honest truth, you’ll need a lot of money for retirement. You’ll probably need considerably less a year than you did when you were in the workforce. This is due to both lifestyle changes and the fact that you’ll likely be eligible to collect Old Age Security (OAS) and Canadian Pension Plan (CPP). Wealthsimple’s Portfolio Advisor Mike Allen says that earning a little less in retirement than your top salary tends to work out just fine.
“For financial planning we assume that expenses typically drop to about 70% of the pre-retiree budget,” - Mike Allen, Portfolio Manager, Wealthsimple
Factors that affect retirement savings
There are many factors that affect how much you need to save for retirement. From a change in the pace of inflation rates to a change in life expectancy. Many of these factors are out of your control. You just have to plan for them as best you can. The accounts you use, the place you'll live and whether or not you own a home all significantly effect the amount of money you need to retire.
If lots of your retirement income is tax-free then you might need less retirement savings. All withdrawals on TFSAs are tax-free. If your income is low enough to qualify for GIS, that income is also tax-free. Withdrawals from pensions and RRSP are taxable. OAS benefits are taxable through means testing, meaning that if you earn income over a certain level, the government will reduce your benefit through an OAS clawback, officially known as the OAS “recovery tax.”
Where you live
Move to a place with a lower cost of living when you retire and you'll need to save less for retirement. Some may choose to use a guide like MSN’s or International Living’s to discover affordable places outside of Canada to retire; others may want to look into domestic options. Those who stay close to home should make a solid plan while well as to where they’d like to live if they find themselves unable to tend to themselves. Affordable, subsidized care facilities tend to be in high demand with long wait lists so seniors should be prepared to fund their housing privately which can be extraordinaly expensive. Canada’s Mortgage and Housing Corporation produces an annual report on senior housing that shows that seniors in the highest priced province, Ontario, pay on average $3,618 for their housing, versus those in the lowest priced, Quebec, who pay more than 50% less on average, $1,729. Comment your Français?
Your home may not only affect your retirement, it may well be your retirement. Since such a large percentage of the population doesn’t adequately save for retirement, they may find that they’re forced to sell their home—the largest single investment most people have as well as a forced savings plan—and acquire cheaper digs in order to finance their retirement. The great news is that even if you have to say goodbye to your home, you won’t have to pay capital gains on the sale of your principal residence.
Other sources of income
You may inherit some money that you can put towards retirement savings or a house you can rent out. Lucky you! This will reduce the amount of retirement savings you need. A word of warning, don't get complacent. Studies show that it’s a bad idea to depend on inheritance as many people overestimate it. More dependable than inheritances, are government benefits. The money you get from the government in reduces the amount of savings you need.
Know what your benefits will be
A little news that might shock those under 40. There’s no Retirement Money Fairy after all. Your parents just made her up to get you to relax about your future. Retirement money must instead come from two primary sources your savings and government benefits. That's why it's important to know how big of a gift you're getting from the Canadian government.
There are some retirement benefits that most every Canadian will get, one that depends on how much you’ve personally paid into the system, and others that are need-based.
Old Age Security Pension (OASP) is a stipend that can be had by most Canadians aged 65 or older and is not at all dependent on employment status or history. Got a pulse and a Canadian citizenship? You’re probably going to receive OAS; at last check benefits were just over $600 a month. But if you earn too much—currently, over $128,137 per person—the government will take back every dime of it in the form of clawbacks, which in fancy government speak are known as the OAS “recovery tax.”
Canada Pension Plan (CPP) is a government administered pension designed to benefit not only retirees, but also those who are disabled, and relatives of those who die after having paid into the CPP system. CPP benefits will be entirely dependent on how much you’ve contributed to the system over the years, though payroll taxes.
Guaranteed Income Supplement (GIS) is provided only to retirees earning very low incomes. How low? The numbers frequently change, so best to consult the government’s eligibility tables.
Of the three government programs, OASP, CPP, and GIS, it’s possible that the only one you’ll actually have to take the initiative to sign up for is CPP, which you can collect as early as 60. The very step you’ll need to take is to create a My Service Canada account through the government’s website.
Service Canada launched two program to provide automatic enrollment for seniors to both OASP and GIS.Ideally, Service Canada will send you a notification letter the month after you turn 64 of your eligibility for one or both of these programs. Should you not receive it, you may need to apply, which can be accomplished pretty easily by printing a form from their website and mailing it into the nearest Service Canada office.
Uncover how to save for retirement
Now that you know when you're retiring and how much money you need to save — it's time to figure out how to actually save.
Pay down debt first
Debt is like the hamster wheel of retirement. Even if you're putting a decent amount of money away money towards your retirement, but you carry a significant amount of consumer debt (not a mortgage), you're likely not getting anywhere fast. Think about the APR you have to pay on a credit card for instance. Are you paying 15%? Maybe as much as 20%? Now think about the returns that you might expect in an average year from stock market investments. Between the years of 1950-2009, the stock market grew by 7% per year. When you consider compound returns, 7% is an absolute great return your investment, but not when your debt is siphoning off 15-20% from whatever dept you carry at the same time. So if you truly want that retirement to go towards your post-retirement life, rather than paying off debts you've been carring for decades, nuke the debt before turning towards retirement.
Start as early as you can and contribute as much as you can
It’s truly never too late to start saving for retirement. The important thing is to start! A great first step would be to open an RRSP if you don’t yet have a pension plan through work. It’s a process that will take you about ten minutes and won’t even require you to invest a dime. How much should you contribute? The wiseguy answer: as much as you possibly can, because the more you have, the less you’ll need to worry about running out. The specific answer is a bit more complicated. Experts have suggested that the “magic retirement number” should be ten times your final income, and in order to get there, you should aim to have:
At 30: One year of salary saved.
At 40: Three times your salary saved.
At 50: Six times your salary saved.
At 60: Eight times your salary saved.
At 67: Ten times your salary saved.
Naturally, every retiree is bound to be different, and no one formula will be perfect for everyone. It will certainly be worthwhile to at the very least reach out to a professional financial advisor to discuss a more custom plan for your retirement.
Take advantage of employer matching
You might think of your retirement savings as one of those fabulous champagne towers that you’ve never actually seen at any wedding you’ve personally attended. The top cups always get filled first before anything below gets even a drop of champagne. If money is the champagne in this metaphor, you the absolute tip top cup should be your employer’s Group Registered Retirement Savings Plan. Why? Because employers will often match a portion, or in some cases, 100% of what an employee deposits into her Group RRSP (or GRRSP), basically free money for you that will make an extraordinary difference in terms of compounding gains over the long term. And because you can have your employer withhold funds to deposit directly into your GRRSP, not only will you not be tempted to spend money you were never paid, the money deposited will be pre-tax, meaning that a larger amount of money will get invested right away, versus investing yourself and having to wait six months to a full year to get that money back though a tax refund.
Discover the best retirement accounts and plans
The absolute most important source of retirement income will be from your (ideally) decades of investments through tax-advantaged accounts, like GRRSPs, RRSPs and TFSAs.
The first place you should put any retirement savings is in a work GRRSP that offers matching funds, and you’re free to put up to 18% of your previous year’s income into one of these plans, up to a certain maximum dollar amount, which changes annually. The current max can be found here.
If you don’t have access to a GRRSP with matching funds, you have a choice between investing through an RRSP (Registered Retirement Savings Plan) or a Tax Free Savings Account (TFSA). Like an RRSP, a TFSA is tax-advantaged, with one major difference. You receive immediate tax relief from an RRSP in that any amount you contribute won’t be taxed until you withdraw it in retirement, and at that point, you’ll also pay taxes on any of the account’s investment growth. You will pay taxes in the current year on TFSA contributions but won’t be required to pay taxes on the principle or the gains upon withdrawal. And unlike an RRSP, a TFSA is designed to be easily accessed before retirement if the funds are needed—which is good, unless you happen to be the type who’s never been able to resist smashing a piggy bank. TFSA are generally preferable for those earning less than $50,000 a year, for reasons more fully spelled out in this article.
Investing vs saving for retirement
If you hope to outpace inflation and allow your retirement savings to grow over decades, you’ll absolutely want to have a significant percentage of your portfolio invested in the stock market. But which stocks? And in which sectors?
Should you buy Apple? Or maybe Amazon? What about pharmaceuticals? And consumer staples? What if you wanted so many different things that you just threw up your hands and decided that you wanted to just buy a little of everything. You, my friend, have just diversified without even realizing it. Investing a little bit in many, many things, is known as diversification, a topic into which you could delve more deeply elsewhere on this site. Back in the 1950s, an economist named Harry Markowitz won a Nobel Prize for his Modern Portfolio Theory, illustrating the clear advantages of a well-diversified investor over one invested in just a few handpicked stocks.
How is this accomplished? This Beginner’s Guide To Stocks will give you a valuable primer, but two well established ways to achieve diversification are through active investments (mutual funds) or passive investments (exchange traded funds). Mutual funds pick individual stocks with the aim of beating the market. Exchange Traded Funds (ETFs) aim to track the market. Robo advisors generally invest your money in multiple ETFs allowing for a higher amount of diversification compared to investing in just a single ETF.
RRSP funds and bankruptcy
RRSP’s do have one major advantage over TFSA’s—in the event that you become one of the hundreds of thousands of Canadians who declare bankruptcy every year, your creditors will not be able to garnish RRSP funds thanks to Canada’s Bankruptcy and Insolvency Act. (An exception is made for deposits made within the last twelve months, which may be clawed back due to the prevalence of those trying to shelter money from creditors.)
TFSAs are more easily garnished. Granted, as this informative article on the topic points out, very few people who reach the bankruptcy have any funds left in their TFSAs to garnish. Seizing assets may not be quite so cut and dried, however. This article, How to protect your retirement funds from creditor claims, explains that in some cases, depending on the province in which they reside, freelancers may be somewhat more vulnerable to seizure of RRSP funds.
Since your RRSP account may be your single largest asset, or your second largest if you're a homeowner, you may find yourself tempted to use it as collateral on a loan. Think twice about this. Financial consultant and author Talbot Stevens told the The Globe and Mail that while using RRSP funds as collateral on a personal loan is technically possible, it’s highly discouraged for the major bill you’d have to pay at tax time.
Choose the Right Investment Provider
Now you know how much to save and what accounts to use. Next choose the best investment provider to hold your precious retirement savings. Seeking professional help with your finances can be a scary experience, a bit like taking your car to an unfamiliar garage for repairs. To choose the right investment provider, understand what's important to you, do some online research, check that your money is insured and know what you're paying in fees.
Understand what's important to you
You might like some hand holding or realize that paying higher fees for a financial planner are worth it for a full financial plan specific to your situation. On the other hand you might decide that an automated investing provider with some access to a financial planner is worth the fee saving. If you're an investing genius maybe you'll totally go it alone and make trades yourself.
|Robo-Advisors||Human Financial Sdvisors||Self directed/Online Broker|
|Fees: Typically below 0.5%||Fees: Typically above 1%||Fees: Commission Free Trading|
|Often come with human advice and some access to a financial advisor||Offer a full financial plan and can provide advice on your specific situation||No human advice|
|A hands free approach to investing perfect for people who want help with money management||Useful for people with a high net worth or complicated tax situation||A DIY approach, you have to pick your own stocks. Although it’s cheap it’s a no frills aproach to investing.|
Do some online research
You go to a mechanic because you need to find someone who, unlike you, can tell the difference between a crankshaft and a connecting rod. Will the mechanic prey on your ignorance and charge you $800 for a 13 cent nut? And will an investment provider or an advisor prey on your financial ignorance and convince you to pay unnecessarily high fees to get you invested in products that might not suit your particular needs? Canada’s got a lot of natural resources and unfortunately one of them happens to be Canuck-bred Bernie Madoff style financial scammers like this bad apple in Ottawa and this Montreal scoundrel.
You'll be well served vetting your investment company, advisor or broker. Read online reviews, check online forums, seek out friends recommendations and don't be afraid to ask questions.Inspect their website to understand what services you're getting in exchange for the fees you pay. Will your portfolio be re-balanced (aka always be put back on track) and will you have access to human advice.
But even if you don’t fall into the clutches of felonious investment provider who steals all your money, you could easily find one who siphons off enough money legally to make a huge difference in your retirement.
Check if your investments are insured
You should understand that any stock market investment is speculative and past results should never be understood to be guarantees, but rather imperfect predictors of future performance. If you find a broker who says that he’ll 100% guarantee any investment, run in the other direction. That being said, any reputable brokerage in Canada will be a member of the Investment Industry Regulatory Organization of Canada (IIROC). IIROC members are covered by the Canadian Insurance Protection Fund (CIPF), which will insure any investment account, including RRSPs and TFSAs, up to $1,000,000 in case of a firm’s insolvency.
Know what fees you're paying
There are two kinds of fees that you must be aware of: investment management fees and Management Expense Ratios (MERs).
Investment management fees are the percentage of your entire portfolio that an advisor charges annually to manage your money. MERs are the fees that a mutual fund or ETF issuer will assess annually on the product that your advisor buys on your behalf-- the operating costs are baked into their funds. For example, if Fund Manager Janice charges you a 1% management fee and buys for you an assortment of ABC Investment funds with MERs that all have 2% MERs—which happens to be a little below the average MER for Canadian mutual funds--you’ll be surrendering a full 3% of your entire portfolio every year to Janice and ABC Investments, regardless of how well the investments perform.
Considering that a decent annual investment return on a balanced portfolio is 5%, even small-sounding fees will be like investment vampires. Left unchecked, they’ll suck every drop of gains in an account. One Toronto-based investment advisor showed that a fee of just 2% could decrease investment gains by half over the course of 25 years. And studies regularly demonstrate that fees are directly predictive of returns in a very simple way; the higher the fees, the lower the returns.
Through the recently implemented CRM2 government regulations make advisors legally obligated to make their fee structures more transparent, fees are still a huge problem in Canada, which has among the highest MERs in the developed world. What’s a future retiree to do?
How to reduce the fees you pay
One particularly effective way to cut fees is to concentrate on investing in funds with lower MERs. Mutual fund managers may say you that their expertise is worth the fees, but, on the contrary, studies show that over the long term, the vast majority of professionals paid to pick stocks fail to outperform the market as a whole. So ideally you might seek average stock market results but reduce your fees as much as possible. This is easily attained by purchasing ETFs which are bundles of different equities that trade on exchanges just like stocks, and often mirror stock indexes like the S&P 500. ETFs' MERs are generally a small fraction of those of those of actively managed mutual funds.
The other way to effectively reduce fees is by cutting investment management fees. A management fee of 1% is common among financial advisors. A relatively new entrant into the financial advisory world are what’s called automated investing services, also known as robo advisors, which tend to create portfolios of low-fee ETFs for their clients for a fraction of the fee of a typical financial advisor. Do your research. Some robo advisors may be all digital and offer limited if any human support for clients. At the other end of the spectrum are those that offer unlimited human telephone support for every client.Ready to save? Take advantage of our state of the art technology, low fees, and friendly financial advice, and sign up with Wealthsimple today. Take our risk-free survey and we'll provide you with a personalized portfolio in just 5 minutes.
Prepare for the transition to retirement
It's important to plan how life in retirement will look for you. When you finish working, you'll have much more time on your hands. You should plan what you'll do with it. Do you picture yourself relaxing on the beach — just like the sun lounger on the beach photos you've come across on every retirement article? Perhaps you plan to take up a new hobby you never got around to starting or honing some of your favourite existing skills. Maybe you'll baby sit grand kids, volunteer, get involved in politics or join a book club or an active retirement society. The world is your oyster and we're sure you'll have no shortage of ideas on what to do when you retire.
When you retire taxes and how to (legally) avoid paying them will become a scintillating topic of conversation between your partner or friends. A little planning early on will help you down the line immeasurably. If you have a partner and one of you earns considerably more than another, you’ll definitely want to consider opening a spousal RRSP. Owing to RRSP limits, the higher earning partner will be able to deposit some of their contributions into the lower earning spouse's RRSP. This will provide substantial tax benefits when you begin withdrawing them in retirement.
How to invest when you’re approaching retirement
As you might have discovered upon ever mistaking your partner’s jeans for your own, everyone is different. If you’re among the vast majority of people who will be spending your life savings during retirement, you’ll want to make sure that your money’s actually available when you need to access it.
“The general rule is that as you start approaching retirement, you’ll want start bringing down the level of risk in your portfolio. You don't want your accounts fluctuating significantly in value as you're drawing down some of the capital from your portfolio.” - Mike Allen, Portfolio Manager, Wealthsimple
So, about ten years out, you’d likely want to consider how to switch out some equity investments for something less volatile, like bonds.
But it’s worth considering three popular approaches to asset allocation, the flight path model, the age-in-bonds model, and the aggressive model, all three of which are compared here.
Not all investors will want to take their foot off the gas of equity growth in favor of more secure alternatives. “We see many clients that are retired that have more than enough money to live off for the rest of their life,” Allen says. “They often want more of a growth focused portfolio to continue allowing their estate to grow throughout their decades of retirement.”
Which retirement accounts should you draw from first
Your mission as a retiree is to pay the absolute minimum in taxes as legally possible. Every retiree is different, and a smart retiree will consult a professional financial advisor at least once to construct a bespoke strategy. A few basics to consider though. Try to withdraw from accounts that will not trigger an OAS clawback. Doug Dahmer, an Ontario-based retirement income specialist recommends that most people should put off collecting one or both Old Age Security (OAS) and Canada Pension Plan (CPP) benefits unlit they reach age 70. You could also convert your RRSP into an RRIF early and withdrawing some of those funds. This will result in an overall major tax savings—and also reduce the OAS clawbacks you’d eventually be subject to if your income were too high. Many financial advisors will argue that the TFSA is the absolute last source you should tap as a retiree. That said, since it grows tax free, it’s a good place to locate your equity investments, and if you plan to leave something to your heirs, a TFSA’s a good place for those funds. Check out our deeper dive on retirement strategies to learn more.
How to know if you're money will run out
Unless you like the idea of crashing on your kid’s futon a few years into your retirement, how long your money will last is about the most pressing question you’ll want to address long before your actual retirement date.
Because fewer than 50% of pre-retirees actually have any kind of financial plan, the absolute first thing that Wealthsimple portfolio managers like Mike Allen will do when they first meet with clients is to take a close look at their financial situation. The reason behind this, to understand what your financial picture looks like on paper.
For the early birds who have a few decades runway before retirement, Allen will recommend a strategy of putting 20% of your income towards retirement. “Whatever you’re making, if you’re saving 20% of your income you’ll be able to have full income replacement in retirement after 25 to 30 years,” Allen says. Many people may find that they have higher earning years in their 40s and 50s, so when they retire, so if they stick with that plan, they’ll be able to take an average of their career long earnings. (For example, someone who made $50,000 for fifteen years and $100,000 for fifteen years would be able to depend on retirement income of $75,000.) Here's a few handy tips on putting together a savings plan.
But Allen says that Wealthsimple clients aren’t just millennials with decades until retirement. They’re often older folks hurtling towards retirement age with far less saved. “Even if you’re a year or two away from retirement, even if you’ve done nothing, it doesn't mean that you shouldn't start now, because however late you might feel you are, you’ll only be improving your situation by doing some financial planning,” he says. “There may be sacrifices and choices that you're going to have to make but starting today instead of delaying it any further will make those decisions a little bit easier.” Get started here.
Ready to take the first step to taking charge of your retirement? Sign up to Wealthsimple the only automated investing services to offer all of its client’s unlimited human support. Every Wealthsimple client gets state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from a low-priced investment service.
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